In the next two years, the coal market in China exceeds the demand for coal prices
In response to the ongoing challenges in the coal sector, the Ministry of Land and Resources has announced that it will continue to accept new applications for coal prospecting rights nationwide. Analysts suggest that this move aims to manage the oversupply in the market, which has been driving down coal prices due to excess production capacity. However, with demand from key industries like steel and cement still weak, coal prices may continue to decline despite these regulatory efforts.
According to data from the Ministry, China currently holds vast coal reserves, with over 2,300 exploration rights representing around 500 billion tons of resources. Meanwhile, more than 23,000 coal mining enterprises hold over 270 billion tons, accounting for 23.4% of total reserves, while 76.6% remain untapped. This suggests that there is significant potential for future development, but also highlights the need for careful management of supply.
Despite this, domestic coal production capacity has been expanding rapidly. In 2008, China produced 2.716 billion tons of coal, with an estimated 400 million tons of idle capacity. The approved production capacity now exceeds the targets set by the National Mineral Resources Plan, raising concerns about overcapacity.
The State Council’s recent National Mineral Resources Planning aimed for 2.9 billion tons of coal production by 2010. However, with over 520 coal exploration licenses issued between 2007 and 2008, and many more expected from provincial authorities, the actual production capacity could far exceed planned levels.
Although coal prices have fallen due to the global financial crisis, some investors still believe that post-crisis demand will remain strong. However, social investment in coal exploration and mining has remained low since late 2008.
CITIC Securities analyst Wang Ye warns that overcapacity will persist in the next two years, emphasizing the importance of controlling the issuance of new coal prospecting rights to stabilize the market and prevent excessive investment. This approach is seen as critical for the long-term health of China's coal industry.
In the short term, weakened demand from power generation and industrial sectors is expected to put further pressure on coal inventories. CICC analysts predict continued downward pressure on coal prices after April, as middlemen avoid price inversion, leading to a second wave of price declines.
Additionally, international coal prices remain significantly lower than domestic rates. For instance, in 2009, Australia offered coking coal at $129/ton, thermal coal at $70/ton, and jet coal at $90/ton—far below Chinese spot prices. This trend is likely to exert further downward pressure on domestic coal markets in the coming months.
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